Pre-Approval vs. Loan Commitment: What’s the Difference & Which One Do I Need as a Homebuyer?

Posted by Laine Smith on 7/18/16 12:16 PM

Topics: Home Buying

Mortgage rates have spiraled down to historical lows again and the summer homebuying market is in full swing. A hot housing market means more buyers vying for potential homes, but what does this have to do with your home financing? A lot.


Meeting with a mortgage lender should always be your first step in homebuying. While shopping for a home with a pre-approval is better than shopping without, a loan commitment can give you a dependable head start against other buyers while expediting the loan process.

Pre-Approval: The Basics

In order to be approved for a loan, a lender must verify various aspects of your finances and the home you are purchasing. Typically lenders begin this process with a pre-approval.

To get a pre-approval the lender will run your credit score and compile a loan application with the information you provide regarding income, employment history, assets, etc. The lender will analyze this information and issue a decision on whether or not you are eligible for a loan. If you are qualified for a loan, the lender will issue you a pre-approval that states your qualification subject to verification of certain items, such as income and assets.

Loan Commitment: The Basics

A loan commitment takes the pre-approval process a few steps further. To verify your financial information, your lender will ask forvarious documents including tax returns, pay stubs and W-2’s. Once verification is completed, the lender can issue a loan commitment. This commitment provides information about the loan that the lender has agreed to provide to you. It indicates the amount of money being loaned, the interest rate that you are qualified for*, type of loan and period of time for which the commitment is good.

But how does this benefit a homebuyer? A loan commitment allows you to:

  • Present the best offer on a property. In multiple-offer situations, a loan commitment shows that you are a serious buyer and are ready to purchase. A loan commitment can give a financed homebuyer cash-offer power.
  • Have peace of mind. A loan commitment is a reliable vow from your lender for your purchase. It’s like having mortgage approval even before finding a home to purchase (pending a home appraisal).
  • Act quickly. Having your loan ready prior to finding a home allows you to expedite the loan process, which is a win-win for homebuyers and home sellers. Click here to see the timeline of a pre-approval vs. loan commitment.

Lack of inventory, coupled with low interest rates and rising home prices, has spurred a competitive market. Get yourself in the best position to purchase a home by speaking with one of our mortgage bankers.

If you’re interested in purchasing your first home, download our free Mortgage 101 Handbook for everything you need to know about qualifying, loan options and the homebuying process.

Download: Mortgage 101 Handbook

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